Why did Morgan Stanley and Goldman Sachs become banks?

Because they needed guaranteed access to the Fed window where they could borrow cheap, cheap, cheap.

Sure, the Fed has been letting everyone but your sister borrow from a special facility, but that special facility is not guaranteed to be around forever. Notice that immediately after the declaration, Berkshire Hathaway (i.e., Warren Buffet) ponied up $5 billion, with $2.5b more from a stock offering to come. Nomura, a Japanese company, acquired 20% of Morgan Stanley—immediately after the announcement.

You can lay long odds that both those deals were contingent on the change to bank status.

Investors, and especially foreign investors, want to know that if they buy in again, they’re protected. Since they aren’t going to be allowed to buy up the US’s financial sector for pennies, that means they need to know that prices will be maintained so they aren’t buying pigs-in-a-poke.

Which is also why the Paulson or Dodd bailout is still likely to wind up on the books.

If the US doesn’t bail out its own financial sector (by borrowing money it doesn’t have) then the only people with enough money are foreign sovereign funds and large investors. And they will bail it out for cents on the dollar at fire sale prices. The end result would be that New York would, definitively, no longer be the world’s financial center. Odds on favourite to be the new one? Dubai. London doesn’t want the job (they want to be middlemen). Tokyo can’t quite do it. Shanghai isn’t ready.But Dubai is raring to go.

And that’s one real reason why Congressional leaders and Wall Street CEO’s are panicking.

If Wall Street isn’t bailed out by Congress, the executives will all be either working for Chinese and Arabs, or they’ll be out on the street, drowning their sorrow in their 50 feet yachts drinking $100,000 dollar bottles of whine. Er, wine.